2010 (5) TMI 98 - HC - Income Tax

Tax Deducted at Source (TDS) u/s 194J liability of TPA - whether, while making payments to hospitals TPAs are required to deduct tax at source under the provisions of Section 194J meaning of professional services - Circular 8/2009 dated 24 November 2009 Held that a hospital by itself, being an artificial entity, or a corporate enterprise which conducts the hospital is not a medical professional. - when it imposed an obligation under Section 194J to deduct tax, Parliament imposed that obligation on any person (not being an individual or a Hindu Undivided Family) who is responsible for paying to a resident any sum by way of fees for professional services and the expression professional services has been defined to mean services rendered by a person in the course of carrying on inter alia the medical profession. Where the provision of medical services takes place within the institutional framework of a hospital, services are rendered as part of an umbrella of services provided by the hospital which engages qualified medical professionals who practise the medical profession. These are services rendered in the course of the carrying on of the medical profession. Hence, it is not possible to accept the submission that TPAs, when they make payments to hospitals are not liable to deduct tax at source under the provisions of Section 194J. TPAs are required to deduct tax at source (TDS) Circular no. 8/2009 regarding imposition of penalty is in violation of the restraints imposed upon it by the provisions of sub section (1) of Section 119. To that extent, therefore the circular that was issued by the Board would have to be set aside and is accordingly set aside.

Issues Involved
1. Applicability of Section 194J of the Income Tax Act, 1961 to payments made by Third Party Administrators (TPAs) to hospitals.
2. Validity of Circular 8/2009 issued by the Central Board of Direct Taxes (CBDT).
3. Interpretation of "professional services" under Section 194J.
4. Authority of the CBDT to issue directions under Section 119 of the Income Tax Act.

Issue-wise Detailed Analysis

1. Applicability of Section 194J to Payments Made by TPAs to Hospitals
The primary issue in these proceedings is whether TPAs are required to deduct tax at source under Section 194J when making payments to hospitals. The petitioners, comprising companies registered under the Companies Act, 1956, and a trust, argued that the payments made to hospitals under cashless hospitalization schemes should not be subject to tax deduction under Section 194J. They contended that hospitals do not carry on the medical profession and hence, payments made to them should not be classified as fees for professional services.

The court analyzed Section 194J, which mandates a deduction of 10% on payments made for professional services. The term "professional services" is defined to include services rendered in the course of carrying on the medical profession. The court observed that while hospitals are not individual medical professionals, they provide medical services through qualified professionals. Therefore, payments made to hospitals for these services fall within the ambit of Section 194J.

2. Validity of Circular 8/2009 Issued by CBDT
The petitioners also challenged the validity of Circular 8/2009 issued by the CBDT, which clarified that TPAs must deduct tax at source under Section 194J for payments made to hospitals. The court upheld the circular to the extent that it aligns with the interpretation of Section 194J, confirming that payments made by TPAs to hospitals are subject to tax deduction.

However, the court found fault with the circular's stipulation that failure to deduct tax would automatically attract penalties under Section 271C. This, the court held, interferes with the quasi-judicial discretion of the Assessing Officer and the appellate authority, as it forecloses the defense available to the assessee under Section 273B, which provides for reasonable cause exceptions.

3. Interpretation of "Professional Services" Under Section 194J
The court delved into the interpretation of "professional services" as defined in the Explanation to Section 194J. It noted that the term "person" in this context is not restricted to individuals but includes entities like hospitals that provide medical services. The court emphasized that the provision of medical services by a hospital, which employs qualified medical professionals, falls under the definition of professional services. Consequently, the payments made by TPAs to hospitals are for professional services and are subject to tax deduction under Section 194J.

4. Authority of the CBDT Under Section 119
The court examined the authority of the CBDT under Section 119 of the Income Tax Act, which allows the Board to issue orders, instructions, and directions for the proper administration of the Act. However, the proviso to Section 119(1) prohibits the Board from issuing directions that interfere with the discretion of the Assessing Officer or the Commissioner (Appeals) in their quasi-judicial functions. The court held that the CBDT's circular, by mandating penalties for non-deduction of tax without considering reasonable cause, overstepped its authority under Section 119.

Conclusion
The court concluded that:
- TPAs are required to deduct tax at source under Section 194J when making payments to hospitals for medical services.
- Circular 8/2009 is valid to the extent it aligns with this interpretation but is invalid insofar as it mandates automatic penalties under Section 271C.
- The definition of "professional services" under Section 194J includes medical services provided by hospitals.
- The CBDT cannot issue directions that interfere with the quasi-judicial discretion of tax authorities.

The court made the rule absolute in these terms and stayed the operation of the judgment for eight weeks to allow the petitioners to seek recourse to their remedies in appeal, with a direction that no coercive steps be taken to enforce outstanding dues during this period.

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